• The market is on your side. You've determined that the market is trending in the same direction you want to swing trade. (If it isn't, you may need to find a different trending market entirely.)
• The industry group is on your side. Stocks tend to follow their industry groups up or down. If the security's industry group is trending strongly in the same direction you want to swing trade, chances are your trade will be profitable.
• If you're trend trading, the candidate is moving out of a base. The candidate should be in an existing uptrend or downtrend that has pulled back in the short term. Use the ADX indicator to determine whether a trend exists.
• If you're trading ranges, the candidate has just bounced off of support/resistance with a technical indicator confirmation. Watch for the technical indicator (an oscillator) to generate a buy or sell signal. Divergences between your oscillator and the price action signal higher-confidence trades.
• The fundamentals back the technicals. Pair your great chart setup with strong fundamentals. And no, you don't need to spend 25 hours reading a company's financial statements. Simply verify the important items, such as financial health, return on equity, P/E ratio, and expected earnings growth rates.
• The stop loss level is near your desired execution price. The best swing trading candidates are those where your emergency exit is nearby. The closer your desired entry price is to your stop loss level, the less you stand to lose if matters turn ugly.
• You allocate the right amount to the trade. Loss is always possible, even with the best swing trading candidate. Set your position size in accordance with your trading plan, which should put an absolute ceiling on your position size and set a maximum percentage of capital you're willing to lose.

How to Manage Your Risk when Swing Trading

The most important determinant of whether you'll be a successful swing trader is how well you manage risk. Ask yourself these questions before placing a trade to ensure you don't cut corners:

• Is the security liquid?
• Is the security a penny stock (hopefully not)?
• Are you prepared to limit losses at the individual stock level?
• Determine which precautionary measure you'll take:
  Set the position size based on the percentage you're willing to lose (0.25 percent to 2 percent of total assets).
  Set the risk level as a straight percentage of assets and that percentage doesn't exceed 10 percent of your total portfolio.

• Is your portfolio diversified? Make sure your positions are spread among different market capitalizations (for example, large cap, mid cap, and small cap), different sectors, and asset classes (not to mention domestic and international securities).
• Have you limited your total portfolio losses to 7 percent? Cover all your bases by confirming that
  Each security in the portfolio has a risk amount equal to the difference between the current price and stop loss level.
  The difference on an individual security level is tight — around 0.50percent.The sum of those differences doesn't exceed 7 percent of the total portfolio value.
  The stop loss levels are at a level representing a profit (barring a gap in prices, of course).

Cut losses when your stop loss is hit — no questions asked.

It is important to follow a routine when trading. That is a system that has a defined approach and strategy proven over time. It’s not about being right all the time, it’s about knowing when to exit a trade and move on.